GFI CEO Gooch Says Hedge Funds Need to Become Market Makers

By Matthew Leising, Erik Schatzker and Stephanie Ruhle -
Jul 9, 2012

Hedge funds will need to take more
execution risk in derivative and bond markets as the Volcker
rule remakes how banks and their clients trade with one another,
said Michael Gooch, chief executive officer of GFI Group Inc. (GFIG)

“Hedge funds will become an important part in market
making,” Gooch said in an interview today with Erik Schatzker
and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

Hedge funds and asset managers have traditionally relied on
their dealer banks when they wanted to buy or sell bonds. The
Volcker rule, part of the Dodd-Frank Act regulatory overhaul,
bans proprietary trading by banks. As a result, firms have cut
their inventory of corporate bonds to almost their lowest levels
since 2002, making it harder for investors to easily and cheaply
buy and sell debt.

BlackRock Inc., the world’s largest money manager, said in
April that it plans to start a bond-trading system that will
allow investors to bypass investment banks by matching clients’
orders rather than relying on Wall Street firms or other
electronic networks to trade bonds. Goldman Sachs Group Inc.
began its GSessions trading system last month to match
customers’ demand to buy and sell corporate debt.

GFI Group, based in New York, has offered matching sessions
in corporate bonds and derivatives for two years, Gooch said.

‘Different Role’

“The banks are going to be in a different role going
forward,” he said. The opportunities for banks to make money
from their clients will shift to clearing and execution services
in both bond and derivative markets, he said. With banks and
their customers such as hedge funds and asset managers all
seeking out trades, the amount of revenue from the transactions
will become more competitive, Gooch said.

“Without a doubt there will be fee-splitting,” Gooch
said.

Money managers such as BlackRock and Pacific Investment
Management Co., which owns the world’s largest mutual fund,
won’t be willing to replicate the bank role of taking either
side in bond or derivative markets, Gooch said, though they will
be willing to express interest in one side of a trade they like.